Readers' comments

Businesses need to take responsibility for their performance on an ethical, moral level as well as on financial terms.
Using loopholes and back doors to justify suspect practices simply doesn't make them right and auditors who enable or endorse these should be much more accountable.

The root of the problem is government bureaucrats and politicians purely and simply. Laws that encourage mortgaging houses to the hilt, led to sub-prime mortgages. Laws that made lenders lend to people who would not normally qualify for mortgages led to bad mortgages being bundled into batches of CDO's. FASB and SEC rules led to bad accounting rules.

Another huge problem is auditors relationship with management. They are SHAREHOLDERS' AUDITORS! They should be reporting to shareholders on management. Instead they cater to management so as to obtain other lucrative assignments. They should not be permitted to have any conflicts and should do no other work for corporations, end of story. That would eliminate all the conflicts. They would then report to shareholders on management.

She died in 1995. Yet her signature later appeared on thousands of affidavits submitted by one of the nation's largest debt collectors, Portfolio Recovery Associates Inc., in lawsuits filed against borrowers.

Some regulators complain that the use of Ms. Kunkle's name reflects an epidemic of mass-produced, sloppy and inaccurate documentation in the debt-collection industry. Lawsuits have surged as more borrowers fall behind on payments and collection firms turn to courts to get what they are owed.

￼
Details about Martha Kunkle, whose name appeared on thousands of affidavits used to collect credit-card debts

•Died in 1995

•Name was used by employees who worked with her daughter

•Minnesota's attorney general is investigating numerous buyers and collectors of consumer debt for falsifying affidavits

Some regulators complain that the use of Ms. Kunkle's name reflects an epidemic of mass-produced, sloppy and inaccurate documentation in the debt-collection industry. Lawsuits have surged as more borrowers fall behind on payments and collection firms turn to courts to get what they are owed.

After being sued for fraud, Portfolio Recovery Associates decided in early 2008 that any documents bearing Ms. Kunkle's name had "defects" and shouldn't be used when trying to collect debts, a company spokeswoman said.

Last July, though, lawyers for Portfolio Recovery Associates sought a court judgment in a lawsuit against a Seattle woman for $2,892.10 in credit-card debt and interest that she allegedly owed. It was a cookie-cutter case, except for one thing: To vouch for the debt's validity, the Norfolk, Va., company included an affidavit signed by Martha Kunkle.

The accounting scam was so smelly that Lehman was unable to find a US law firm that would sign off on its legality. In the end, it retained a British firm that sanctioned the maneuver as legitimate under British law. Lehman had to conduct its “Repo 105” operations through its London-based branch and shift funds from the US to Europe to carry out the deals.

The examiner’s report further detailed the role of the Federal Reserve Bank of New York in allowing Lehman to exchange worthless securities for public funds from March of 2008, when Bear Stearns collapsed and was taken over by JPMorgan Chase in a deal subsidized by the Fed, to September of that year, when Lehman filed for bankruptcy protection. The president of the New York Fed at the time was Timothy Geithner. Obama rewarded Geithner for his services as chief bagman for Wall Street by making him his treasury secretary.

Neither Fuld, whose compensation for 2007 totaled $22 million, nor any other Lehman executive has been prosecuted for their crimes. Nor has any other top executive on Wall Street.

Both the Securities and Exchange Commission (SEC) and the Justice Department have announced investigations into the Lehman collapse, but neither has utilized the wealth of incriminating evidence contained in Valukas’ report to indict either Lehman or Ernst & Young or prosecute any of the executives involved.

Since the examiner’s report, Bank of America and Citigroup have acknowledged falsely classifying billions of dollars in repo transactions as sales rather than financings, akin to Lehman’s Repo 105s. The Wall Street Journal reported: “Many banks have engaged in window dressing on a broader scale—systematically reducing their debt before reporting financial results. The practice isn’t illegal, though intentionally masking debt to deceive investors violates guidelines set by regulators…

“In a speech this month, SEC Chairman Mary Schapiro said ‘misleading window dressing in quarterly reports’ was one factor that has fostered investor skepticism. But the SEC said it hasn’t found any widespread inappropriate practices in companies’ repo accounting. It hasn’t taken any public action against any companies over the issue beyond requiring more disclosure.”

In other words, Lehman’s fraudulent methods were, and remain, pervasive on Wall Street and the actual role of federal regulators is to cover them up and tacitly condone them.

All of the major banks employed—and continue to employ—intricate accounting schemes to shift their losses off of their balance sheets. They precipitated the financial crisis by making billions repackaging what they knew to be dubious sub-prime home loans and selling them as “collateralized debt obligations.”

Lehman’s practices have been partially exposed only because it was the weakest of the big Wall Street firms and was forced into bankruptcy, in part because its bigger rivals, smelling blood, took aggressive actions to push their struggling rival over the edge. The bigger firms—Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, American International Group (AIG)—were deemed “too big to fail” and made the beneficiaries of hundreds of billions of dollars in taxpayer bailout funds.

As a Financial Times columnist noted Wednesday: “But then comes the question: what about other banks and auditors that used similar tricks? Citigroup and Deutsche Bank (audited by KPMG) and Bank of America (audited by PwC) all used Repo 105-style transactions, albeit in lower quantities than Lehman. The fact these banks did not explode will probably see them, and their auditors, avoid legal problems. These auditors should be relieved that Citi and BofA were both too big to fail and so received bailouts from Uncle Sam.”

As I understand it the method used to sell and buy back certain assets was just that a sell and buyback operation where the seller in this case Lehman's had to buy back the asset at both a price and at a time certain, which means that in reality the asset never realy ceased to be owned by Lehman's, so how could Ernst& young possibly alowe such a transaction to be seen as legit, it only use was to hide the level of Leverage going down on Lehman's farm. This had to be the sort of information that share holders would like to know

Something let me think that this is not the last sue on probable window dressing. Just because Lehman Brothers were not so lucky as other survivors with unqualified reports.
Besides, the fact of assets swapping could not be the only indicator of potential financial collapse.
I think, that any monopolization leads to more severe systematic error, as far as corporate policy of monopoly multiply the outcome of local audits. It could be a good government policy to oblige equity to change auditors every two-three years through the list of firms complying with audit principals.

In retrospect, we can all look back and join the dots leading to the economic mess. But, what's the root cause and to whom do we point our fingers? I believe all hell was caused by derivatives crafted with self-interest, undisclosed risk and lack of oversight. Blame the auditors and authorities for the latter but roast the investment banks for the sins which include a bleach of fiduciary duties.

EY would say that they followed the principles of America's FASB, and therefore they were able to sign off on the Repo 105 window dressing for several financial quarters. But I would rather say that they applied the letter of the FASB law, so to speak, and missed the whole point of those FASB principles. This is to present a proper picture of the financial situation, sans window dressing. How can a serious audit firm hide behind such a position? And if they do so, what exactly is the value to anyone of an EY audit?

It should scare the sh*t out of us, to realise that we live in an abjectly phoney, pretentious & hypocritical world, where everyone sanctimoniously preaches "honesty, truth & fairplay", but so few among us, truly practise it in our devious & fraudulent lives.

Are auditors and accountants becoming the scapegoats-of-first-resort for any and every crisis? The manner in which allegations fly does seem to suggest so, although one needs to concede that incompetent or even crooked auditors might in some cases be pieces of a larger jigsaw.

The economic crisis of 2008 was created by failures on many fronts - corporate governance, loose regulation, lack of proper risk management processes within companies, and unethical acts across a broad spectrum of business activity. Going after any single firm or entity may not be as remunerative in terms of yielding lasting solutions as addressing the underlying structural or other causes.

@meomy: As for the specific query posed by you, I guess global accounting firms make it easier for executives of transnational companies to choose auditors for local operations - they can go for the local arms of reputed global firms instead of settling with an unknown local firm of questionable track records! Of course, that alone cannot be a reason for sustaining or encouraging the creation of global accounting monoliths.

All said and done, it is important that when dissecting crises (macro or micro economic), we should resist the temptation to launch knee-jerk reactions, hunt for convenient scapegoats, and/or search for silver bullets!

Not being familiar with US auditing standards I cannot be sure whether they have a post balance sheet events examination requirement. Under UK requirements Auditors are required to examine this statement from the company as it may be material to the reported state of the company.
If this requirement does exist in US standards then surely the reversal of the swap is a material event that should be reported on. I'm curious as to whether this happened or not. If it did then information on the balance sheet dressing was in the public domain and the fault lies with the reader of those accounts. If not then someone needs to start answering some questions, as the accounts were patently misleading notwithstanding SEC pronouncements.

In all fairness, no matter who the culprit may be, if either or both parties are found culpable of fraud - knowingly cooking the books - they should be, individually or collectively, held responsible for their acts of commision &/or ommision & charged/penalised accordingly, no matter how dire the circumstances or the repurcussions be.

The world may have gotten by without Arthur Anderson, but only because other companies took over their services. Those other companies include EY, KPMG, Deloitte, and PWC (amongst a few other). Without accounting firms investors would have no way of ensuring the company's they are investing in are reporting accurate financial statements. In other words, company's could very easily overstate their net income, earnings, etc... If you read the charges being brought up by this case you'd understand that the problem doesn't exist with EY or other accounting firms, but rather the practices that are allowed under GAAP. EY followed a GAAP allowed method, however this method was clearly misleading to investors. Yet their treatment of Repo 105 was correct as mandated by the SEC. Therefore your suggestion of creating a government owned audit firm would not fix the problem. The problems exist more with the SEC than private accounting firms. Government is not the answer.

What I dislike about articles like this is that they never answer the question of why it is necessary to have global accounting firms. After all, the world seems to have gotten by without Arthur Anderson. Since you people are so darn smart, please answer the question. Suppose there were no global accounting firms, what would happen?
I think that if we look over the 2008 crisis we would have to admit that all the auditors did a lousy job. I would lay that crisis directly at the feet of the auditors. When Arthur Anderson was sued, how many auditors lost their CA, CGA, or CMA designations? Any?
I do not believe that any firm should pay for it's auditors. Auditors, as they exist, have a conflict of interest. All public corporations should be required to pay the government an audit fee, and the government should send in independant auditors of which the individual firm has no control. Auditors should serve the shareholders as well as management, but mainly the shareholders.